three common investing mistakes to avoid - 1pdf.net

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INVESTING STR ATEGIES

Rules of the Road:

THREE COMMON INVESTING MISTAKES TO AVOID Your investment portfolio may need periodic adjustments to ensure it continues to match your goals and risk tolerance. But there’s a right way and a wrong way to go about it. Here are three common mistakes investors make, along with suggestions for how to avoid them.

MISTAKE #1: Letting Emotions Dictate Your Decisions Two emotions—fear and greed—are responsible for many of the poor investment decisions investors make. When stock markets are reaching new heights and grabbing headlines, you may get swept up in the excitement and decide to invest more money in stocks. Conversely, when the stock market is plummeting, fear of additional losses may cause you to sell in a panic. This pattern of buying high and selling low is often a recipe for long-term underperformance. This can be especially true when investing in mutual funds, which often require a full market cycle to realize gains.

SOLUTION: Choose an Appropriate Asset Allocation and Stick With It Understanding how emotions affect your investment decisions can help you avoid costly mistakes. Start by taking the time to determine an asset allocation that’s right for your individual goals and then stick to it. It’s generally understood that asset allocation decisions—the manner in which you divide your money among stocks, bonds, cash, and other asset classes—can be even more important than security selection or market timing decisions in determining your portfolio’s long-term results. One common rule of thumb is to subtract your age from 100 and allocate that portion to stocks. For example, a 60-year-old would allocate 40 percent of her portfolio to stocks while a 50-year-old would allocate 50 percent. However, this approach ignores other critical variables, such as your personal risk tolerance and the time horizon for the specific goal you are trying to meet. For example, if you are saving for a down payment on a home you hope to buy in three years, your asset allocation for that goal may differ from your retirement savings strategy, which may be 30 years in the future. Similarly, if stock market volatility causes you to abandon stocks whenever the market suffers a serious decline, a more conservative asset allocation with less exposure to stocks may be the best long-term strategy for you. Once you have determined an asset allocation that matches your goals, investment horizon, and risk tolerance, don’t let market noise and the inevitable ups and downs disrupt your strategy. Research shows that time in the market—not market timing—is one of the keys to achieving long-term growth.

Take Action: Visit janus.com/assetallocation to access our Asset Allocation Planner tool.

Automate Your Investments To reduce the risk of investing a large amount of money at the wrong time, consider investing a regular amount each month. This methodology, known as dollar cost averaging,* allows you to spread your purchases over time and buy more shares when a fund’s price is down and fewer shares when the price is up. The idea is to reduce your average cost per share over time while still building the number of shares you own.

Take Action: Visit janus.com/automatic to learn more about the benefits of automatic investing.

*A program of regular investing does not assure a profit or protect against depreciation in a declining market. Since a consistent investing program involves continuous investment in securities regardless of fluctuating prices, you should consider your financial ability to continue purchases through periods of various price levels. [Morningstar, Inc., Morningstar, the Morningstar logo, Morningstar.com, Morningstar Category, Morningstar Rating, Morningstar Risk, Morningstar Return, Morningstar Style Box] [is a/are] [trademark/s] of Morningstar, Inc.

MISTAKE #2: Allowing Your Portfolio to Get Out of Balance When the market is rising, it’s easy to let your portfolio go along for the ride. Eventually, this may leave you with a portfolio that’s more risky than you planned. To prevent this from happening, make sure you periodically adjust your portfolio’s asset allocation back to its original targets.

Rebalancing in Action: A Hypothetical Example Asset Class

Stocks

Bonds

Cash

Starting Allocation

$60,000 (60%)

$30,000 (30%)

$10,000 (10%)

3-year Performance

25% gain

2% gain

1% gain

Ending Allocation

$75,000 (65%) +5%

$30,600 (26%) -4%

$10,100 (9%) -1%

Action Taken to Rebalance

Sell $5,580

Buy $4,110

Buy $1,470

Ending Balance

$69,420 (60%)

$34,710 (30%)

$11,570 (10%)

SOLUTION: Rebalance Your Portfolio Regularly How often and when should you rebalance? Opinions vary, but experts often suggest revisiting your asset allocation annually and rebalancing if your allocations are 5%-10% off target. For example, if you originally planned to allocate 60% in stocks, 30% in bonds, and 10% in cash, market action would likely cause your portfolio to fall out of balance over time. After a lengthy bull market for stocks, this could leave you with a 70% allocation to stocks. To get back in balance you would need to reduce your exposure to stocks and add to your bond and cash holdings. You can rebalance by selling shares of assets that have appreciated and reinvesting in assets that are below your target allocation. When rebalancing in non-retirement or non-qualified accounts, however, exchanges between funds could result in taxable short- or long-term capital gains. One way to avoid this is to direct future contributions to those asset classes that are currently underweighted, rather than selling shares of appreciated assets.

Take Action: Review your portfolio with a Janus Representative at 800.525.3713 or log in to your account at janus.com.

MISTAKE #3: Failing to Consider the Big Picture It’s important to revisit your asset allocation at least annually. When reviewing, however, don’t forget to examine your entire financial picture and how your assets are allocated across all of your investment accounts.

SOLUTION: Perform a Full Diagnostic on Your Entire Portfolio Every Year Viewing your accounts in separate silos can be dangerous, as it may provide an inaccurate view of your risk exposure. This may cause you to have too much (or too little) exposure to certain asset classes or market sectors. For example, you may have a large allocation to emerging markets stocks in your 401(k). But if a fund you own in your IRA also has a large allocation to emerging markets, this could leave you overexposed to this asset class if you aren’t looking at the big picture.

401k Portfolio Indicates Overexposure to Emerging Markets: 25%

50% domestic stocks

Take Action: Utilize Morningstar’s Instant X-Ray tool to analyze your portfolio.

20%

bonds

5% cash

Adding IRA Assets to The Mix Indicates Reduced Exposure to Emerging Markets:

To properly assess your asset allocation, you need to examine the actual holdings of each fund you own to get a true picture of your asset allocation. To help facilitate this process, consider Morningstar’s Instant X-Ray tool. This tool sorts through the holdings of each fund you own and provides a report that details your overall exposure to each asset class. Be sure to include all of your mutual fund and individual holdings and if you’re married, include your spouse’s assets too.

emerging markets stocks

10%

60% domestic stocks

emerging markets stocks

25%

bonds

5% cash

Looking for more? Please contact a Janus Retirement Representative at 800.525.1093. Investing involves risk, including the possible loss of principal and fluctuation of value. The information provided is educational in nature, is not individualized and is not intended to serve as the primary or sole basis for your investment or tax planning decisions. No investment strategy can ensure a profit or eliminate the risk of loss. Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market. S&P 500® Index measures broad U.S. equity performance. Janus Distributors LLC

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